Free trade means eliminating all restrictions in trading between two countries. Some of those restrictions are tariffs or quotas.
Imagine that you have a country A and a country B who wish to trade with each other. Country A has plenty of coal and has mastered efficient ways how to produce coal thus making coal price very cheap. Country B only has little coal reserves, and it's extraction method are not as efficient as in country A. Consequently, the price of coal is lower in country A other than country B
If country A wants to export coal to country B it has to pay tariff. Tariffs are kind of a tax. Tariff is calculated on the price or amount of coal. It must be paid by either exporter from country A or importer from country B. ...view middle of the document...
They have tried to make exactly same wine, but it's quality simply couldn't match that of country B. But they also have to pay tariffs if they want to export it. At the end price of the same wine would be higher in country A than in country B because of tariffs.
The most prevalent view by all economists today on free trade is that it is a good thing for both economies, and that it should be eliminated all whatsoever. In the ideal world there should be no tariffs, quotas or any kind of trade restriction. Good should be allowed to freely flow over the border. Why? Lots of economic models have been made to analyze it, and the conclusion is that free trade is good because of comparative advantage and specialization.
Country A is better in producing goal, and country B is better in producing wine. If we reduce tariffs, country A would produce more coal and it would be cheaper for everyone. Country B will produce more wine which will be cheaper for everyone.
Companies in country A which have produced wine would stop to exist because all wine production will move to country B. But all production of coal would move to country A instead.
The final result is that everybody is a winner, both producers and consumers. Consumers get cheaper products, produces have access to bigger market and produce more thus making higher profits. Country A has a competitive advantage in producing coal, but country B has competitive advantage in producing wine.
Also, if we impose too strict trading regulations, we might have problems with illegal activities like smuggling.
The most important model of free trade is David Ricardo's model of competitive advantage.